Is Capital Gains Tax Applicable on Gold Coin Purchases Under Sec 44AD?

Ans: When you purchase gold, it can be classified as a capital asset under the Income Tax Act. This classification means that capital gains tax is applicable when you sell gold coins or bars. Let’s break down the essentials.

Capital Asset Classification and Tax Implications
Gold coins and bars are considered capital assets. Any profit made from selling them is subject to capital gains tax.

Short-Term Capital Gains (STCG): If you sell gold within three years of purchase, the profit is classified as STCG. This profit is added to your income and taxed according to your applicable income tax slab. This classification can increase your tax liability if you are in a higher tax bracket.

Long-Term Capital Gains (LTCG): If you hold gold for more than three years before selling, the profit is classified as LTCG. LTCG is taxed at 20% with the benefit of indexation, which adjusts the purchase price to account for inflation. This adjustment can significantly reduce your tax liability.

Indexation Benefit: How It Works
Indexation is a method used to adjust the purchase price of an asset for inflation. This adjustment can reduce the taxable capital gain. The government provides a cost inflation index (CII) each year, which is used to calculate the indexed cost.

For example, if you bought gold in the financial year 2023-24 and sold it after three years, you could use the CII to adjust the purchase price for inflation. This adjustment would lower the taxable gain, reducing your tax liability.

TDS on Gold Sales
There is no tax deduction at source (TDS) when you sell gold. However, you must report any capital gains from the sale in your Income Tax Return (ITR) for the relevant financial year.

Implications of Using Section 44AD
Section 44AD is a presumptive taxation scheme for small businesses and professionals. Under this section, profits are presumed to be a certain percentage of turnover or gross receipts. However, if you purchase gold using business funds, the purchase must be recorded in your books of accounts.

Business Income: If the gold purchase is treated as a business transaction, profits from selling the gold will be added to your business income. You will be taxed under your business’s tax slab rate, which may or may not benefit from indexation.

Personal Income: If the gold purchase is a personal transaction, capital gains from the sale will be taxed as described earlier. This classification is important to ensure proper tax treatment and compliance.

Impact of GST on Gold Purchases
When you buy gold, you pay Goods and Services Tax (GST) on the purchase. However, GST is not applicable when you sell gold. Instead, you are taxed on the capital gains. It is important to keep the purchase invoice safe as proof of GST payment. This documentation can help you during tax assessments.

Reporting Gold Transactions in ITR
All gold transactions, including purchases and sales, must be reported in your ITR.

Disclosures: When you file your ITR, you must disclose the purchase and sale of gold under the capital gains section. This disclosure ensures transparency and helps avoid any legal issues.

Documentation: Maintain detailed records of all transactions, including purchase receipts, sale invoices, and any related expenses. This documentation is crucial for accurately calculating capital gains and ensuring compliance with tax laws.

Importance of Proper Valuation
The value of gold can fluctuate significantly. Proper valuation at the time of sale is crucial to ensure accurate tax calculation.

Valuation Methods: There are two methods for valuing gold—market value and cost price. The cost price is the original purchase price, while the market value is the current price of gold at the time of sale. For capital gains calculation, the cost price is adjusted for indexation, and the sale price is the market value.

Independent Valuation: In some cases, it may be beneficial to get an independent valuation of your gold before selling it. This valuation can provide an accurate assessment of your gold’s worth and help you determine the best time to sell.

Tax Planning Strategies
Effective tax planning can help you minimize the capital gains tax on gold sales.

Timing of Sale: If you plan to sell gold, consider holding it for more than three years to benefit from LTCG tax rates and indexation. This strategy can significantly reduce your tax liability.

Gifting Gold: Gifting gold to a relative may be a tax-efficient strategy. However, the relative may be subject to capital gains tax when they sell the gold. It’s important to consider the potential tax implications for both the giver and the recipient.

Utilizing Losses: If you have incurred capital losses from other investments, you can use these losses to offset the gains from gold sales. This offset can reduce your overall tax liability.

Other Important Considerations
Wealth Tax: Although wealth tax has been abolished, it’s important to note that gold was previously subject to wealth tax. Now, there are no wealth tax implications for holding gold.

Inheritance: If you inherit gold, the capital gains tax applies when you sell it. The cost of acquisition for the inherited gold is the cost at which the original owner purchased it. The holding period of the original owner is also considered when determining whether the gain is short-term or long-term.

Gold ETFs and Bonds: While we’re not focusing on index funds, it’s worth noting that Gold ETFs and Sovereign Gold Bonds are alternative ways to invest in gold. These instruments offer tax advantages, such as no capital gains tax if Sovereign Gold Bonds are held until maturity.

Final Insights
Understanding the tax implications of gold purchases and sales is crucial for effective financial planning. Whether you are purchasing gold as an investment or for personal use, being aware of the tax liabilities can help you make informed decisions.

Professional Guidance: Consult with a Certified Financial Planner (CFP) to ensure that your gold investments align with your financial goals. A CFP can provide tailored advice based on your unique situation.

Compliance: Ensure that you comply with all tax regulations when purchasing and selling gold. Proper documentation and reporting are essential to avoid legal issues and penalties.

Holistic Approach: Consider how gold fits into your overall investment portfolio. Diversifying your investments and understanding the tax implications of each asset class can help you achieve long-term financial success.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in